Union Budget FY26 to focus on inclusive growth

FY25 witnessed a steep drop in GDP in Q2 to 5.4 percent far below the market expectations as against the 8.1 percent growth recorded in the previous year. The slowdown in GDP is evident from the pulse of high-frequency indicators. Amid the sluggishness, the Union Budget – 2025-26 (UB26) can be an effective means to resurrect the economy.

The industry is looking forward to measures to revive consumption and growth. However, the expected farm sector and service sector growth is pinning hope that the economy should improve in H2 to end FY25 at 6.5 percent while the RBI forecast is at 6.6 percent. 

The average monthly collection of GST for FY25 is expected to reach Rs.1.81 trillion while the direct taxes can hit Rs. 16.9 trillion against the estimated Rs. 13 trillion. The dividend of RBI transferred to the government was at a high of Rs. 2.11 trillion. The surge in these fiscal flows can support the fiscal consolidation process.

As a result, the fiscal deficit target of 4.9 percent of GDP is expected to be met and can even end lower at 4.8 percent. The surge in revenue growth is expected to be maintained in GST and income tax as digitalization is widening the base of taxpayers. The fiscal deficit for FY26 can be pegged at 4.5 percent of GDP steeply down from a high of 9.2 percent in FY21 due to covid crisis on the way to further fiscal consolidation. The task of the UB26 is well deciphered. 

While continuing fiscal consolidation, the allocational efficiency will be to put more money in the hands of people to revive consumption, revive private investments, and prompt capacity expansion to steer growth. It will need to focus on infrastructure, capex, and employment generation. 

• Expectations from UB26:

The income tax slabs can be rationalized and some specific exemptions in the old scheme can be introduced in the new scheme to phase out the old tax regime. Exemptions from NPS, Life insurance, and health insurance for salaried class and seniors may come up. The net impact may leave some money in the hands of the taxpayers. The ease of filing returns, relaxed norms for senior and super seniors, and better compliance standards can find a way. 

During FY25, against the allocation of capex of Rs. 11.11 trillion, only Rs.5.3 trillion was spent which was 12 percent lower than FY24. The shortfall could impact employment and limit its multiplier impact on the economy. Even the capex spent by states was lower impacting with overall drag of the economy. More than the allocation, monitoring the use of capex will be under scrutiny. 

Though it is too early, while continuing multiple employment generation schemes, apprenticeships, and internships in the corporate sector, some changes may be seen in administering them to improve impact. Focus on women-centricity and protective measures for gig workers will continue in UB26 with certain improvements in their granularity.  

The shortfall in disinvestment targets is a recurring phenomenon and far deeper enablers and reforms may be needed to make it work.  The process of disinvestment in IDBI is a work in progress that can be hastened. The UB26 can revive privatisation move of two PSBs and one national insurance company proposed during 2021-22. that was announced earlier. Even further consolidation in PSB space cannot be ruled out. Seminal insurance sector reforms are expected to achieve the target of ‘Insurance for all by 2047’. BFSI sector will attract strategic attention to step up growth. 

Given the geopolitical shifts, the new regime in the US and the faster revival of the Chinese economy calls for reforms to attract higher levels of foreign investments. The trend of depletion of forex reserves from US $ 704.9 billion on September 27, 2024, to US $ 623.98 billion on January 2025, and the spree of depreciation of INR need to be addressed by the appropriate policy shift. The preparedness to cope with the increase in tariffs and the impact of imposing counter-tariffs will have to be strengthened. The market mayhem created by the Chinese Deepsake AI infrastructure in the global market shows the disruptive power of global spillover risks and how markets have to manage risks. 

• Manufacturing thrust: 

Among the sectoral growth trends, manufacturing continues to be weak. The manufacturing PMI in December 2024 was a 12-month low at 56.4 rebounding to 58 in January 2024. Out of this, MSME plays a pivotal role next only to the farm sector. MSMEs need greater focus and ease of doing business as 5.7 crore MSME units are employing 24.14 crore individuals and are registered in Udyam registration portal and Udyam Assist Platform.  

Bank credit has the power to drive the growth. The bank credit growth is 8 percent as of January 10. YoY credit growth is 11.5 percent as against 20.3 percent but the asymmetry in credit flow could be a disrupter. Bank credit to industry during 2024 till November 2024 was 8.1 percent as against 15.3 percent to farm sector, 14.4 percent to service sector and Personal loans grew by 16.3 percent. 

The corresponding flow of credit was 5.5 percent in 2023, farm sector -18.1 percent, service sector – 22.2 percent and personal loans 18.7 percent. The industry receives the least bank credit among all sectors but has an immense multiplier impact on different sectors of the economy. New PLI schemes, strengthening technology parks, exports of services and creating systemic policy rigidity to ensure that MSME units receive payments and credit in time may find space. 

FY26 will put forth the knack of prioritization to turbocharge the economy with a set of reinforcing measures strengthening each other. Creating an ecosystem to revive private investment, thrust on capacity expansion, and timely completion of infrastructure projects will be essential. 

• Forward-Looking: 

Going forward when the interest rates descend, the borrowing costs will ease prompting investment in capacity expansion and growth. While fiscal consolidation and control on debt to GDP ratio now at around 82 percent is important, fixing subsidies and financing social schemes are equally critical. Unless purchasing power is infused, the economy cannot revive. The direction of UB26 will set the tone for the growth of the economy in coming years and how the competitiveness is maintained. The vibrancy of the economy will depend upon how the measures are able to strengthen employment-oriented inclusive growth. In the external sector dynamics, the way the trumponomics is converted into an opportunity can decide prospects of growth. It will also signal the RBI to sync the pulse of monetary policy to realise the goals set in fiscal policy. UB26 can bring about a tectonic shift in balancing growth and fiscal prudence.